Criminal investigation looks at a state law

By Philip J. LaVelleUNION-TRIBUNE STAFF WRITER

March 24, 2005

The long arm of the law just got longer at San Diego City Hall, with the District Attorney's Office informing top officials there yesterday that it has launched a criminal investigation into the troubled pension system and its 13-member board of trustees.

In a confidential letter, hand-delivered to City Attorney Michael Aguirre and distributed to top city officials, the district attorney's investigators gave City Hall until Wednesday to hand over records or face possible search warrants.

With that, the investigators confirmed for an already rattled city establishment that they are marching down a well-worn path, one trekked for more than a year now by federal investigators.

The logical end point for the federal and local investigations could be indictments, criminal prosecution and the threat of prison.

But unlike the FBI and U.S. Attorney's Office, which are investigating whether federal statutes have been broken, the District Attorney's Office appears focused on a narrow question: whether California's conflict-of-interest law was violated.

At issue are pension board votes in 2002 in which a majority of trustees, including several city employees, endorsed letting the city underfund the retirement system.

Public documents that have come to light since 2002, including in an internal investigation conducted for the City Council by the law firm Vinson & Elkins, show that pension board members had been led to believe that a benefits package offered to employees by the city was contingent on the board approving the underfunding.

Those benefits included special enhancements for union presidents who represent thousands of city workers.

Today, the $3.6 billion San Diego City Employees Retirement System has a deficit of at least $1.37 billion -- due largely to underfunding, benefit increases and investment losses in 2000-02 -- with a bailout expected to strain city services and burden taxpayers for years.

And now the saga has the potential of winding up in federal and state courts.

District Attorney Bonnie Dumanis declined to comment on the letter from her office.

"As you know, I can neither confirm nor deny that our office is involved in an investigation," she said last night. "For those of us in the criminal justice system, we are aware of our legal and ethical obligations, and it's for that reason that I cannot comment on this matter."

Mayor Dick Murphy, through a spokesman, declined to comment last night.

City Manager Lamont Ewell, contacted shortly after 6 p.m., said he was out of the office but was informed by his staff that the letter had arrived.

"I was called by my office about 20 minutes ago," Ewell said. "They shared with me that a letter was received. I asked them to place it on my desk. I'll be there in the morning, I'll read it and I'll probably call Ms. Dumanis to ask for particulars."

Councilwoman Donna Frye learned of the investigation from a reporter last night and said it was disturbing news.

"I certainly think there needs to be an investigation," she said. "I'm sort of surprised to see the district attorney (investigators) engaged, but I don't know enough to know about their role, and what the scope of their investigation is."

Frederick W. Pierce IV, president of the soon-to-be-disbanded pension board, said: "It sounds like yet another agency or authority is looking into the same issues that multiple other entities are looking into. . . . It seems to me that all the agencies should get together and coordinate whatever investigations they deem necessary so that they can be most efficient and the least redundant as possible."

Pierce also pledged "full cooperation."

But the pension board has stopped short of the level of cooperation recently agreed to by Murphy and the council, refusing to waive attorney-client privilege to hand over certain documents sought by federal investigators.

Pierce said, "I can't get into the privileged communication that we had. . . . What I can tell you is the state constitution puts our duty of responsibility to the retirement system and its members above all other duties, and we have determined that because the request to waive the privilege pertains to ongoing litigation, it would not be in the best interests of the system or the members to release that information."

Under Proposition H, passed by San Diego voters in November, a new retirement board will take office in April. The current board held its final meeting Friday.

Since mid-February 2004, the FBI and U.S. Attorney's Office have been investigating possible financial crimes at City Hall, focused at least in part on the pension system, and are conducting a separate probe into possible public corruption.

Somewhat less ominously, the Securities and Exchange Commission, which can levy fines and sanctions but does not pursue criminal prosecutions, is investigating possible securities fraud violations.

The SEC investigation appears focused in part on why significant facts about the pension system underfunding were not disclosed in city documents provided to Wall Street bond investors.

These developments have crippled the city's ability to sell bonds to raise cash for important city projects, scuttling mandatory water and sewer upgrades and casting doubt on fire station and library projects.

The District Attorney's Office investigation appears to be focused on a California law that prohibits public employees from participating in official actions that serve to benefit their personal financial interests.

Among the records sought:

o Audiotapes and minutes of City Council meetings, including closed sessions, involving discussions and votes on pension underfunding and special benefits for union presidents.

o E-mails, from Nov. 1, 2001, to the present, involving current and former pension board members Cathy Lexin, Mary Vattimo, Teri Webster, Sharon Wilkinson, John Torres and Ron Saathoff.

Neither Saathoff, president of the politically influential firefighters union, nor others named in the letter could be reached for comment last night.

Lexin is the city's human resources manager. Until recently, Vattimo was the city treasurer and Webster the acting auditor. Both have been reassigned to lower-profile tasks in the wake of an uproar over their failure, alleged by Aguirre, to hand over documents subpoenaed by federal investigators.

The current crisis has its roots in the mid-1990s, when the city formally began paying less into the pension system than the system's actuary said was owed.

The action, approved during the administration of then-Mayor Susan Golding, enabled the city to free up cash to balance its operating budget.

Despite the underfunding, the system's asset levels were healthy through the late 1990s, thanks to the booming stock market, where much of the system's assets are invested.

After the market tanked in 2000 to 2002, the retirement system's assets plunged, revealing deep damage from investment losses and the years of underfunding and of benefit increases.

This sparked a fiscal crisis in 2002, because under the 1996 deal, the city was required to make a balloon payment to the system if its funded ratio -- a measure of assets versus liabilities -- fell below 82.3 percent.

As the pension system's assets plunged toward the 82.3 percent floor in 2002, city officials realized that the resulting balloon payment -- since estimated at $500 million or more over a couple of years -- would have swamped city finances.

So, instead of making that balloon payment, a council majority, this time under Mayor Murphy, fashioned a new underfunding plan, with a promise to pay more into the system later this decade. To sell it to an initially reluctant pension board, the deal included pension benefits for city workers and special benefits for labor union presidents.